Energy Tribune

David Pursell is a managing director and head of macro research at Tudor Pickering Holt and Company, a Houston-based energy investment and merchant-banking firm. Pursell spent eight years at S.A. Holditch and Associates (now part of Schlumberger) and did a stint for Arco Alaska, where he helped manage field engineering and operations. Pursell hold B.S. and M.S. degrees in petroleum engineering from Texas A&M University. He exchanged e-mails with Robert Bryce in early December.

ET: We recently talked on the phone about peak oil. Where do you see the peak oil crowd as having their facts wrong?

DP: I am not sure when oil production is going to peak, but since Colonel Drake discovered oil, everyone who has called the top of oil production has been wrong. The initial peak oil theory developed by M. King Hubbert, used to accurately predict the peak in U.S. Lower 48 onshore oil production, is reserve-based…one has to know the reserve picture to make a peak oil projection. I find it interesting that many peak oilers have also been very vocal about the lack of solid global reserve data.

ET: What’s your prediction for the price of oil for 2008?

DP: $75 per barrel. Not $100. Because I am making this prediction in the Energy Tribune, I am destined to be wrong! That said, I am not convinced that oil prices will keep rising in 2008 if demand growth remains anemic. I have been called a bear on oil, but keep in mind that the average oil price in 2007 is going to be about $70 per barrel. So a $75 per barrel estimate in 2008 is not bearish!

ET: We talked about the resilience of the demand for oil. You pointed to the transportation market as being a key factor. Will higher prices destroy some of this demand?

DP: Demand has been more resilient than I expected, given $3 per gallon retail gasoline prices. But, when one looks at history, transportation fuels have been the most resilient portion of the barrel. In the early 1980s, global oil demand declined for several consecutive years. However, the biggest decline occurred in the industrial sector, not transportation fuels. This is an important point, as the end use of the oil barrel is a larger percentage of transportation fuels than 25 years ago.

The real question is [at] what price point does the consumer push back and consume less gasoline? It is a difficult question to answer, as using less gasoline in the near-term means driving less…a huge life-style change!

ET: You’ve said that natural gas provides a good comparison for what you think will happen with the oil market. Why?

DP: It may surprise people to know that United States natural gas demand has not grown in the past six years, even though there has been significant growth in the gas-fired power generation. U.S. gas production and Canadian imports effectively hit a plateau in 2000, at the same time many were predicting significant demand growth driven by the power sector. Because supply was not growing, natural gas prices (and not demand) grew as increasing gas prices acted to moderate demand growth. The market worked.

Although we don’t believe oil production has peaked, we are certainly in a low growth mode. Non-OPEC supply has grown less than 1 million barrels per day (about 2 percent) annually over the past few years even though oil prices have steadily increased. In a market where non-OPEC supply growth is less than 1 million bpd and “normalized” demand growth is closer to 2 million bpd, this puts more pressure on oil prices to regulate demand as OPEC has less and less capacity. As I mentioned before, I think the market forces are already acting to dampen demand growth as supply has a tough time keeping up with historical demand growth.

ET: While we are talking about gas, given the non-existent growth in U.S. demand for natural gas, do you expect prices to stay flat? Is there any good news for the domestic natural gas market?

DP: We expect more onshore gas production in 2008 and, believe it or not, flat Gulf of Mexico production. The GOM has been in decline since 2001! LNG is also likely to grow in 2008 and 2009. But there is good news. Canadian production is poised to decline in 2008 due to several recent tax changes. Also, as long as the U.S. economy grows, the U.S. power sector will consume more and more natural gas. Finally, we expect natural gas will be treated favorably (compared to coal and oil) when carbon tax legislation is eventually passed, probably after the 2008 presidential elections.

ET: Last February, your firm did a report on the growth of the global LNG market. Are you still bullish on the growth of LNG? And what’s your take on the prospects for marine compressed natural gas (CNG)?

DP: Yes. We believe we are on the cusp of a global natural gas market, driven by growth in LNG. From the beginning of 2007 through 2010, there will be [a] 12 billion cubic feet per day (more than 50 percent) increase in global liquefaction capacity. All areas of the world will increase consumption, but the U.S. is poised to be the market of last resort, given the most sophisticated and robust storage and pipeline network. That said, global LNG adds a complicated set of variables into the North American gas calculus such as winter weather in Europe, hydro in Spain, and nuclear outages in Asia.

We have no firm-wide opinion in CNG.

ET: Which sectors of the energy business are the most attractive to you now? And to be more specific, which equities do you like? Please give me your top five, and a brief explanation for why you like them.

DP: We like E&P and oil service, but those with either international/oil exposure or those North American leveraged companies with strong and visible production growth. Specifically:

1. Apache – due to oil exposure and strong cash generation.
2. Southwestern Energy – premier U.S. gas production growth name in the Fayetteville Shale.
3. Equitable Resources – strong and underappreciated Appalachian natural gas position.
4. Transocean – the Exxon Mobil of the deepwater drillers. Great fleet, position, and earnings visibility.
5. Halliburton – Underappreciated stock. Well positioned internationally.